Any business can be at risk of fraud, so it is essential to implement measures to protect your interests and those of your employees. Adopting best practices and implementing internal controls is the best way to achieve this.
You may say, “We are a solid business with honest employees. We would know if there was money missing. Even if there were fraud, we would catch it before it could impact our business.”
The ING Fraud Case: A Cautionary Tale
In response, we would like to share a story about the Financial Services giant ING and its employee who embezzled nearly $8.5 million over four years. Due to a lack of internal controls, Nathan Mueller almost got away with it.
How the Opportunity Was Created
Mueller became part of ING when his company, ReliaStar, was acquired by ING. Mueller was part of a transition team, which created an opportunity for him to commit fraud.
With access to financial reporting, journal entries, and checks and wire payment processing, Mueller had unhindered access to ING’s money. He was mistakenly given the authority to approve checks up to $250,000 and soon began taking advantage of this loophole.
Pressure Builds Over Time
Mueller’s fraudulent activities didn’t begin upon ING’s acquisition of ReliaStar. It wasn’t until three years at ING that he experienced a life-changing event that created pressure for him to embezzle money.
His wife became pregnant, and he struggled to afford all their bills.
How the Fraud Unfolded
Mueller started small, requesting a $1,100 check written out to “Universal,” his credit card company, under another employee’s account. He then approved the check under his account.
The accounting department issued all checks to Mueller’s department, where they were to be forwarded to the appropriate recipients. Mueller took the $1,100 check and sent it to his credit card company, which credited it to his account.
Mueller replicated the process that summer, eventually paying off $88,000 in his debt using company money. Over the next four years, Mueller stole approximately $8 million from his company.
Suspicions were not raised until his ex-wife, whom he divorced during this period, inquired about his extra income with Mueller’s coworker. This led to an internal inquiry being launched and Mueller eventually being exposed.
How Does a Fraud Triangle Affect the Practice of Fraud Risk?
The Mueller case reveals numerous factors that typically lead to fraud within a business. This next section will discuss the three factors – known as the Fraud Triangle – that lead to business fraud.
The Three Elements of the Fraud Triangle
A fraud triangle consists of three elements that keep fraud thriving in a business, primarily when it’s not controlled. These three factors are:
- Pressure
- Opportunity
- Rationalization
This framework is widely referenced in professional guidance, including analysis published by Harvard Business Review on organizational risk and misconduct.
Understanding the Three Drivers of Fraud
Pressure
Some people engage in fraud due to a shortage of revenue, personal financial problems, pressure from banks, etc. When channeled in the right way, pressure can lead to increased production.
However, when channeled inappropriately, people can resort to irrational and illegal means to solve a problem.
- Divorce/Family problems – The pressure of divorce and other family problems often leads to fraudulent acts.
- Financial Difficulties – Financial difficulties can lead employees to engage in fraudulent acts to settle debts.
- Addiction – Gambling, Drug, and Alcohol addicts are constantly under pressure to get money.
- Medical Bills – The increase in the price of drugs and other health facilities has put people under pressure to meet financial needs.
Opportunity
Opportunity is the second factor in the fraud triangle. Pressure leads to impatience, which leads to immoral ways of solving a problem.
Fraudulent opportunities present themselves when a business lacks the following:
- Improper Segregation of Duties – No individual should be allowed to start a financial transaction and finish it.
- Lack of Management Oversight/Lack of Fraud Education – All employees must undergo fraud education classes to minimize fraud risk.
Strong governance and oversight practices are a core focus of professional Audit & Assurance services.
Rationalization
This is the last element in the fraud triangle. Rationalization tells us how employees justify their actions to commit fraud.
They usually don’t see themselves as criminals. Instead, they try to justify their actions using statements such as:
- “Nobody will get hurt.”
- “It is only temporary.”
- “I am only going to borrow the money.”
Internal Controls Recommendations and Their Benefits
Now that you know the basics of minimizing fraud in your business, let’s discuss further steps to reduce your risk.
Why Internal Controls Matter
Our number one recommendation is to implement Internal Controls, which systematically help minimize fraud risk in any business.
Segregating duties through internal controls helps ensure a smooth flow of finance, the efficiency of operations, compliance with applicable laws, and achievement of a business’s goals.
- Proper Authorization
- Segregation of Duties
- Independent Internal Audit Function
- Proper Documentation and Records
- Physical Control
- Regulatory Compliance and Risk Management
Many organizations address these risks through broader Business Advisory Services that support governance and financial controls.
Nine Best Practices to Minimize Risk of Fraud
In addition to recognizing threats and implementing internal controls, businesses should also consider incorporating these best practices.
Operational and Cultural Safeguards
- Organize Fraud Awareness Programs for Employees
- Monitor Your Data
- Implement Company Policies on Confidentiality and Nondisclosure
- Hire the Right People
- Set Up a Whistleblower Hotline
- Recruit Knowledgeable Accounting Experts
- Organize More Training Programs for Workers
- Regular Review of Accounts
- Succession Planning
Guidance from Accounting Today consistently emphasizes the role of internal controls and education in reducing organizational fraud.
Businesses are best served when they adopt a zero-tolerance policy for fraud and implement internal controls. By embracing proven practices, you can protect your business from fraud.
FAQ
The following questions summarize key themes discussed above and clarify how fraud risks can develop within an organization.
Can fraud really happen in well-established companies?
Yes. The ING case shows that even large, reputable organizations can experience fraud when internal controls are weak.
Why didn’t the fraud get detected sooner?
A lack of segregation of duties and oversight allowed one employee to initiate and approve transactions without review.
What role does personal pressure play in fraud?
Personal events such as financial strain or family changes can create pressure that contributes to fraudulent behavior.
Is fraud usually a one-time decision?
No. Fraud often starts small and escalates over time when it goes unnoticed.
How do internal controls reduce fraud risk?
Internal controls limit opportunity by ensuring no single employee has unchecked access to financial processes.
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